Half Yearly Report

RNS Number : 9944X

TR Property Investment Trust PLC

26 November 2014

 



This announcement and the information contained herein is not for publication, distribution or release in, or into, directly or indirectly, the United States, Canada, Australia or Japan.

TR PROPERTY INVESTMENT TRUST PLC

Financial Report for the half year ended 30 September 2014

26 November 2014

Financial Highlights and Performance	At  30 September 2014 (Unaudited)	At 31 March 2014 (Audited)	% Change
Balance Sheet
Net asset value per share	261.82p	254.94p	+2.7
Shareholders' funds (£'000)	831,274	809,438	+2.7
Shares in issue at end of period (m)	317.5	317.5	+0.0
Net debt1	15.9%	14.0%
Share Price
Share price	254.40p	247.50p	+2.8
Market capitalisation	£808m	£786m	+2.8
Discount to NAV	-2.8%	-2.9%
	Half year ended 30 September 2014 (Unaudited)	Half year ended 30 September 2013 (Unaudited)	% Change
Revenue
Revenue earnings per share	6.05p	5.98p	+1.2
Net interim dividend per share	2.95p	2.85p	+3.5
	Half year ended 30 September 2014 (Unaudited)	Year ended 31 March 2014 (Audited)
Total Return Assets and Benchmark
Benchmark performance (total return)	+2.6%	+14.9%
Net asset value total return	+4.5%	+22.4%
Share price total return	+4.7%	+37.7%
Ongoing Charges2
Excluding performance fee	N/A	+0.80%
Excluding performance fee and direct property costs	N/A	+0.75%
Including performance fee	N/A	+2.08%

1. Net debt is the total value of loans (including notional exposure to CFDs) and debentures less cash as a proportion of net asset value.

2. Ongoing Charges is an annual calculation therefore does not apply to the half year.

Dividend

An interim dividend of 2.95p (2014: 2.85p) per share has been declared payable on 6 January 2015 to shareholders on the register on 5 December 2014. The shares will be quoted ex-dividend on 4 December 2014.

Chairman's Statement

Introduction

Pan European property equity values continued to appreciate in the first half of the financial year but at a more modest pace than we have seen in the previous two years. Property continues to offer investors a recurring income stream greater than most fixed income investments but with the added possibility of capitalising on economic growth through rising rents. However, the last six months has witnessed a growing consensus that much of the Continent will continue to face the prospect of little or no economic growth for a considerable period. The stand out exception has been the UK and the demand for commercial property has been extremely robust as investors appreciate that rental growth is materialising rapidly. Our UK physical portfolio outperformed both Continental and UK property equities in the period and our managers continue to actively manage the assets. We intend to expand this part of the portfolio.

Despite the weakening economic outlook, Continental property stocks outperformed those in the UK in the last six months as investors anticipated further monetary stimulus from the European Central Bank ("ECB"). Our management team have maintained their strategic focus on markets likely to experience rental growth and hence maintained a strong UK bias in the portfolio. Relative outperformance in the period was therefore a consequence of careful stock selection despite the geographical bias working against them.

The Trust's earnings projections have increased in the period, partly due to a one off receipt (more details below) but also reflecting the ability of our investments to still lower their cost of debt. This is the other side of the low growth coin. Well capitalised public companies have accessed steadily lower cost of debt due to fierce competition amongst banks.

NAV and Share Price Performance

I am pleased to report that the NAV total return for the six months to the end of September was +4.5% whilst the benchmark total return was +2.6%. Encouragingly the share price total return was +4.7% as the discount between the NAV and the share price narrowed a little further.

More detail and commentary on performance is set out in the Manager's Report.

Revenue Results

Revenue earnings at 6.05p per share are marginally ahead of earnings at the same stage last year (5.98p). We had anticipated lower earnings for the current financial year, however, in the first half, Max Property unexpectedly paid a significant dividend representing the cumulative earnings of the company since inception. Max Property had not paid a dividend at all up to that point. Subsequently the company was acquired by a private equity fund and delisted.

Dividend

The Board has announced an interim dividend of 2.95p per share an increase of 3.5% over last year's interim of 2.85p.

Revenue Outlook

The dividend receipt from Max Property provided an unexpected boost to earnings in the first half. In addition, our largest investment, Unibail, has announced that it will return to paying an interim and final dividend, rather than the single distribution they have been making since 2009. The first interim payment will fall into the current financial year, increasing earnings in the second half. The overall result is that we now anticipate earnings for the full year will be ahead of the level seen for 2013/14. However, with some dividends due to us right on the cusp of our financial year-end, there is still scope for some of these to slip back into the next financial year so it is impossible to predict the outcome with any degree of certainty, even at this stage.

Looking further forward, our development activity at the Colonnades, although expected to increase the capital value of the asset, will create some drag on the income generated for the next 12 months. The expectation of lower levels of indexation across the Continent will also impact dividend growth rates.

Net Debt and Currencies

Net gearing has slightly increased over the period from 14.0% to 15.9%.

Sterling appreciated against all the European currencies over the period, although most of this strengthening occurred after a large part of our Euro denominated income had been received. The main dividend season for the Scandinavian companies is towards the end of our financial year. Further weakening in these currencies may have some impact, although these account for only 3% of our total income.

We maintain the strategy of hedging the capital exposure in line with the benchmark.

Discount and Share Repurchases

The discount (on Income NAV) ended the period at 2.8% slightly lower than 2.9% at March and averaged 2.5% through the period. There were no share repurchases in the period.

Our Portfolio Manager continues to be tasked with investor communication and our dedicated website (www.trproperty.com) provides current and extensive background data on the Trust.

The Trust is offered as part of the F&C savings plan and our Registrars, Computershare, offer dealing options for certificated holders and a Dividend Reinvestment Plan (DRIP) option for the reinvestment of dividend for holders

on the main register.

Alternative Investment Fund Managers Directive (AIFMD)

AIFMD came into effect on 22 July. Our AIFM is F&C Investment Business Limited with portfolio management delegated to the former Investment Manager, Thames River Capital LLP.

Although this necessitated a raft of new documentation and some one-off legal costs and, going forward, additional internal reporting requirements, there is no change to the way in which the Fund is managed or of the management team. The arrangements in respect of the management fees are unchanged.

BNP Paribas has been appointed as Depositary in addition to their previous role as Custodian. The Depositary role is somewhat more onerous than that of Custodian alone and additional fees are incurred for this service. The fee is on a tiered basis, based on gross assets. At current levels this equates to around 1.3 basis points per annum.

Awards

The Board is pleased to report that TR Property has been named "Best Alternative Investment Trust" in the "What Investment" Investment Trust Awards 2014.

Outlook

While it is not difficult to cite issues which make the overall economic outlook on the Continent less than comfortable, we continue to believe that investment in property retains its attractions. Investors continue to seek income-producing assets and, as I mentioned earlier, the greater willingness of banks to lend to the property industry at a lower cost of debt, supports their ability to pay out that income.

I mentioned in the Annual Report that a key to our optimism has been the very low level of new commercial development since the crisis and the genuine shortage of good quality business space in a number of key markets. It is encouraging to now report that where there is renewed tenant demand this is translating into rental growth as this supply/demand disequilibrium swings in the landlord's favour. Our Portfolio Managers' task continues to be identifying those markets and then selecting management teams and balance sheets capable of exploiting these, really, very exciting opportunities presented by such a subdued development cycle.

Caroline Burton

Chairman

26 November 2014

Directors' Responsibility Statement

The Directors acknowledge responsibility for the interim results and approve this Half-Yearly Financial Report. The principal risks facing the Company are substantially unchanged since the date of the Annual Report for the year ended 31 March 2014 and continue to be as set out in that report.

The Directors of TR Property Investment Trust plc confirm that to the best of their knowledge:

(a)       the Half-Yearly Financial Statements have been prepared in accordance with IAS34 as adopted by the European Union and give a true and fair view of the assets, liabilities, financial position and profit for the period of the Group as required by the Disclosure and Transparency Rules ('DTR') 4.2.4R;

(b)       the Chairman's Statement together with the following Manager's Report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

(c)       the report includes a fair review of the information required by DTR 4.2.8R.

Approved by the Board on 26 November 2014 and signed on its behalf by Caroline Burton, Chairman

Manager's Report

Performance

The Net Asset Value total return for the six months was +4.5%, ahead of the benchmark total return of +2.6%. The share price total return (assuming dividend reinvestment) was +4.7%. Looking back, the start of the period was very much a moment in the midst of upwards momentum in property equity values across the globe. From the end of March to mid-May the pan-European real estate equity sector rose +8.2%, outperforming broader European equities (as measured by EuroStoxx 600) which rose +5.9%. The performance in the first quarter of the new financial year brought the run of consecutive positive quarters up to eight (the last negative one being March-June 2012). The macro environment still dominates with sentiment rising and waning on the anticipation of a change in direction / tempo of central banks' attitude to further monetary stimulus. The first quarter saw continental stocks outperform UK companies (when measured in local currencies) by an astonishing 916 bps. The key factor was the anticipation of the ECB announcing new measures to combat the perceived risk of disinflation through unorthodox monetary stimuli. In effect the markets expected the cost of borrowing money to fall further - a positive for leveraged assets. On this side of the Channel central bank policy appeared to be changing direction and Governor Carney's Mansion House speech in May hinted that the market's expectation of the timing of rate rises was too optimistic. Predictably this caused a downwards correction in UK property equities in June which compounded the gap in performance between Continental and UK property shares.

The direction of all central bank policies reflects the mandate set before them and Carney's comments merely reflected the signs of an improving business environment in the UK which has subsequently been verified in the more recent sets of economic data. The demand response (for commercial space) which London and increasingly the South East of the UK has been experiencing has resulted in resurgent rental growth. This has also now flowed out into certain regional markets such as the West Midlands industrial and logistics markets. We have faced one dominant quandary, either buy into the reality of rental growth in the UK but with the likelihood of an interest rate cycle that will heighten more quickly or alternatively focus on further falls in the cost of capital (through falling debt costs) in the Eurozone courtesy of further ECB stimuli. The latter, of course, comes with the caveat of minimal inflation indexation and only a handful of markets with rental growth.

Eurozone stocks then underperformed in July even though Draghi announced a raft of measures including negative overnight rates (a stick to encourage banks to lend) and further cheaper longer term loans (a carrot to encourage them to lend). The market, which had risen on the back of expectation in Q1, was then underwhelmed with the reality. Renewed concerns over the lack of growth, rising unemployment and a reluctance by politicians to drive austerity packages and labour reforms (in some Eurozone countries) led to poor performance amongst most Eurozone stocks over the summer. UK stocks, on the other hand, enjoyed a stronger summer as investment in the underlying property market became frenzied with yields tightening across all asset classes both prime and secondary. In the second quarter UK stocks outperformed European names by 370 bps.

Property Investment Markets

In the Annual Report I highlighted the fact that investment demand had clearly shifted beyond the early cycle recovery plays of focusing on the strongest dominant commercial centres such as London. This ripple effect has been most notable in the UK but is also visible in parts of the Continent. In the UK, (primarily) domestic buyers have bought aggressively into virtually all regional markets across a broad range of sectors. The yield gap between prime and secondary which reached its widest in August 2013 (as measured by IPD) has been steadily tightening ever since. Investors are increasingly confident of UK rental growth and are prepared to pay sharper initial yields as a consequence. UK transactions of £22.8bn in H1 2014 were 40% ahead of H1 2013. Investors increasing focus on higher yielding regional investment is also visible in other countries which are experiencing economic recovery such as Sweden and Germany - both of which have a history of longstanding local institutional property ownership.

Continental Europe has also experienced much greater investor interest, although here the focus of investor attention has been on prime rather than secondary property. With little occupier demand buying shorter income streams or financially weaker tenants still requires a heightened level of yield compensation. The first half saw investment volumes across the Eurozone reach EUR 84bn, an increase of 26% on H1 2013. France and Germany were predictably the largest markets and their combined investment volume exceeded the UK. The ripple effect on the Continent is clearly seen at the national level with Spain, Ireland and the Netherlands all experiencing strong growth in activity. This ties in with the amount of capital raised in IPOs by opportunistic funds seeking to acquire assets particularly in Spain and Ireland. Prime assets in Madrid, Barcelona and Dublin have experienced the sharpest capital value growth since 2005/6 as global capital seeks to gain early entry into perceived recovery plays.

Dublin has returned to the ranks of the Top 10 largest European investment markets for the first time since H2 2006 with investment turnover of EUR 1.3bn. The fund participated in the IPO of Green REIT in July 2013 and the follow on raising in May 2014. Green REIT has now invested €800m and continues to seek further investment opportunities.

Drilling into the amount of cross border investment also reminds us that global capital movements are key to demand and pricing pressure. Most notable this year has been US interest with investment of EUR11.5bn in H1 2014, double that of the previous year. Whilst the UK had the largest share (36%), Germany (23%) and France (17%) were also important destinations of this capital.

Offices

London continues to confound the sceptics with H1 2014 rental growth in the West End running at 4.8 %. Relatively new office submarkets such as Clerkenwell, Shoreditch or reinvigorated areas such as Kings Cross were expected to soak up demand from more traditional Midtown and fringe West End markets. In fact the evidence suggests that the evolution of these areas has sucked in demand which may not have previously considered central London. Jones Lang LaSalle estimate that London will create 270,000 new office jobs in the next 5 years and minimal supply in traditional locations will create demand in these newer submarkets.

The West End has 'lost' significant amounts of office space to residential conversions. In 2013, 795,000 sq. ft. converted and there is a further 1.5m ft. in the pipeline. Since 2001 6m sq. ft. has switched uses. To put this number in perspective there is currently only 250,000 sq. ft. of grade A space available (in buildings of more than 25,000 sq. ft.). Vacancy is at a record low of 2.4%. We remain confident in the positive rental growth dynamics across London and have maintained our exposure through the nimble smaller players Great Portland Estates, Derwent London, Shaftesbury, Workspace, CLS and of course the larger names Land Securities and British Land.

City of London take up in Q3 2014 reached its highest level ever at 2.3m sq. ft. surpassing the previous record set in 2000. Whilst Amazon (430,000 ft.) and M&G (323,000 ft.) drove the record figure it is important to note that creative industries accounted for 29% of all deals whilst finance / banking only accounted for 22%. The City of London now attracts a much more diverse range of occupiers than historically.

Rental growth has spilled out into a number of regional markets, particularly the Thames Valley and the larger regional cities. In the Western Corridor broad vacancy stands at 13.1% only slightly lower than 12 months previously. However, prime office vacancy from Hammersmith to Reading stands at 4.2% with annualised rental growth at a healthy 6%. As occupier demand steps up the better quality vacant space is the first to be filled.

In Paris the divergence of performance within the office market (which is larger than Greater London) continued with the core 'Golden Triangle' experiencing growth whilst rents in La Defense and the inner western suburbs are now bottoming out. Take up in H1 2014 of 1.1m sq. m. was 23% ahead of the same period last year but dominated by a few large transactions. Incentives remain generous but encouragingly supply under construction is at its lowest level since 2012.

H1 2014 saw prime rental levels rise in Madrid for the first time since the crisis began in 2008. Whilst this is encouraging it is important to note that it is only for prime buildings within the core Central Business District ("CBD"). Across the city vacancy has not declined from over 17%. Meanwhile in Dublin rents are rising quickly (+14% in the last 12 months) and vacancy across the city has fallen by 3% to 14.2% in Q2 2014.

Despite these improvements, across the Continent as a whole (as measured by CBRE's EU-28) the vacancy rate has remained stubbornly high at 11.3%. The Ukraine crisis has had a significant impact on the economies of Russia, Central European Europe and Finland. Ironically it is these countries which also have the largest development pipelines, Moscow, St Petersburg, Warsaw and Prague. This will inevitably lead to further rental weakness.

Distribution and Industrial

In the UK, industrial and distribution property remain investors' preferred regional exposure outside of Greater London. The IPD Industrial sub-sector initial yield tightened by 67 bps in the first 9 months of 2014 bringing total return for the first 9 months to 17.4%. A high yielding asset class which has traditionally experienced a rapid rental growth response to rising GDP continues to prove attractive to investors, thus fuelling price rises and yield compression. Buyers have been forced to accept more risk (older buildings, shorter leases) as yields on prime stock have dropped below 6%. The UK accounted for 40% of all pan European transactions, the highest transaction volume since 2007.

On the Continent the demand from both occupiers and investors alike remains focused, in the main, on better quality, well located, modern premises. Given the broad lack of underlying economic growth the levels of take-up, particularly in distribution is slightly surprising. However, much of this is focused on a handful of strategic hubs in Northern Europe. Once again the most active occupiers were third party logistics and retailers. The rapid evolution in e-commerce and consumer's shopping habits is driving enormous structural change in this industry and much of their occupational property is not fit for purpose. The continued lack of core development has begun to put upward pressure on rents. CBRE's EMEA Industrial Rent Index rose 0.4% in Q2 2014. Whilst modest it is the fifth consecutive quarterly gain with Paris, Rotterdam and Dublin leading the way.

Retail

Our investment strategy continues to focus on the largest or the most local as we believe that the enormous structural shifts in how, when and where we all shop, driven by constant technological evolution, makes this sector the hardest asset class in which to identify the winners. Even though much of Continental Europe is suffering from poor consumer statistics, CBRE's European Prime Rent Index rose at an annualised 4.1% in Q2 2014. However the data highlights the focus from retailers on the most dominant and established city centre markets such as London, Paris, and Milan together with the largest German cities. German workers continue to experience real wage growth and hence rising spending power, unlike much of the remainder of Continental Europe.

The UK is currently building less than half the amount of retail space that is under construction in either Spain, Italy or France. Once again, we find ourselves with a market backdrop where the locations experiencing the greatest (relative) demand are also benefiting from the lowest supply of new space. However even where there are signs of employment growth (such as the UK) real wage growth remains modest.  Consumer behaviour is being buoyed by rising house prices - the trajectory of which is less certain in the short run.

Residential

Our exposure to the residential sector remains focused on the UK, Germany and Sweden. Over the last six months we have increased our exposure to German residential. We are confident that rents will continue to rise (albeit modestly c.2% per annum) and that wage inflation would ensure that tenants could afford to pay. Further falls in the cost of debt (German banks have been lending aggressively in their domestic market) also contribute to rising Earnings Per Share ("EPS").

Our exposure in the UK was focused on regional housing and land banks (Grainger Trust, St. Modwen) and our London exposure was mid-market (Quintain at Wembley and CLS in Vauxhall). I also commented on our largest underweight being Capital & Counties, the owner of 70 acres at the Earls Court redevelopment site. This investment call reflected both our desire to avoid higher end London residential as well as the valuation reflected in the Capital & Counties share price. The share price has fallen 15% from its February high and the sharp eyed will notice that the fund now has a position. As perverse as it sounds our short term bearish view on the London residential market has become more entrenched but our positive view on London retail (the other half of Capital & Counties business is its £1.3bn holdings in Covent Garden) has become more positive hence a holding was acquired in the period.

The Bank of England's mortgage lending review is impacting larger mortgages and higher loan-to-values and predominantly affecting housing in the South East (particularly Greater London) residential markets. The central bank has therefore managed to deflate the London market without using the blunter tool of raising short rates which would have threatened much of the nascent recovery elsewhere in the country. Nationwide house builders have been reporting excellent operating metrics and they continue to acquire more of their raw ingredient, land with planning permission, from suppliers such as St Modwen.

Debt and Equity Capital Markets

The era of ultra-low interest rates and the ever more Herculean efforts by central banks to encourage the banking sector to lend has resulted in a solid increase in the number of banks prepared to lend to real estate at a lower cost than a year ago. Competition amongst them has resulted in further reductions in the amount that they charge (the margin).

The bond markets have also continued to be an attractive place to raise (or refinance) debt at record-breaking low levels. In the last six months €10.1bn of listed debt has been raised. The equivalent figure last year was €4.1bn. Once again the Continent's largest property company, Unibail utilised the public debt markets to continue to drive down its cost of finance. This is a critical part of any earnings per share growth story when 'top line' revenue growth (like-for-like) is hard to come by. Last year I highlighted their EUR 700m 10 year bond at an all in coupon of 2.5% as an example of large, high quality senior debt issuance. In the first half of this year, the company raised or refinanced €2.8bn of loans including a €500m zero coupon 2021 convertible.

Equity issuance has not been as large as in the last three half year periods although Spain continued to see activity with Colonial's rescue rights issue raising €1.3bn.  In addition there were three IPOs which raised €2.8bn to buy distressed assets or loans. The majority of this was 'blind', ie the companies intend to buy assets after raising the capital. The fund has invested in two of these IPOs, Hispania and more recently Merlin Properties. We subsequently sold the majority of our exposure in the early summer.

In the UK a number of businesses took advantage of the low volatility and stable conditions to raise additional capital mainly from the UK in 10% overnight raisings, Picton (£43m), Capital & Counties (£316m) and Hammerson (£500m).

Property Shares

The most striking feature of our universe over the six months under review has been the outperformance of Continental Europe, EPRA Europe ex UK (in EUR) returned 8.5% whilst UK stocks (in GBP) returned 3.5%. Given the strength of the underlying commercial property market, the performance of UK property shares did disappoint over the period. However this performance should also be viewed in the context of the broader UK equity market where the domestically focused FTSE 250 fell -5.5% between March and September.

Distribution of Assets

UK equity exposure was reasonably stable at 42.6%. The exposure to the UK had increased earlier in the year only to be offset by the delisting of Max Property (2.4% of NAV) in August. Continental European exposure increased slightly reflecting our anticipation of asset value growth, even without rental growth, as a consequence of more central bank stimulus. The physical property exposure reduced slightly as the receipts from the sale of Vauxhall were larger than the subsequent acquisitions.

Investment Activity

Turnover (purchases and sales divided by two) totalled £136.1m and equates to 16.6% of the average net assets over the period. This compares to turnover of 15.2% of average assets in the same period last year. This amount of turnover suggests that the Trust has been slightly more actively traded than in previous half year periods. In fact the figures are skewed by two significant returns of capital from Max Property in the UK and CFI in France. Max Property listed in 2009 with the aim of acquiring distressed assets from motivated sellers in high yielding regional industrial and Central London. The intention was a five year investment period expiring in May 2014 followed by a two year wind up and return of capital. The management duo of Nick Leslau and Mike Brown were well known to us from their previous listed enterprises and we invested at launch and added significantly when the stock was less popular in 2011. In May they announced that in accordance with their stated objective they would not acquire any further assets and would begin returning cash. In July they surprised the market announcing that the entire company would be sold to Blackstone. The total return from IPO was 84.2% and our holding was 2.4% of NAV at liquidation.

The other delisting, CFI in France, was very similar in that the vehicle was set up in 2008 with the intention of also buying distressed assets across the Continent. The sharp improvement in asset pricing in 2010 meant that it completed only one strategic investment, a sale and leaseback of 12 UGC cinemas in France. The sale of the portfolio to the operator in May 2014 resulted in the return of capital split between June and December 2014. The total return on the original investment was 53.9% and again we added to the position at lower prices in 2011 and 2012.

Strategically the fund has followed the course outlined in the Annual Report in June. If anything I have focused more on those submarkets where we believe that rental growth is either evident or the supply/demand dynamic implies that it is imminent hence the UK, Germany and Sweden remain geographically dominant. Within the UK we continue to broaden our regional involvement away from Central London. We participated in Capital & Regional's placing which enabled them to buyout Aviva's interest in the Mall Fund. Whilst the portfolio is mostly mid-market shopping centres (not our preferred asset choice) we believe that these valuations now fully reflect the correction in pricing which has been underway in this sector for some time. Our residential exposure continues to be regionally focused on long term land holdings which are then taken through the planning process, a business model we favour given the chronic undersupply of housing. In April we participated in the capital raising by Terrace Hill Group following its reverse takeover by Urban & Civic. Run by two seasoned development professionals, Urban & Civic had acquired two large potential residential land sites at Alconbury and Rugby.

In Germany, the fund participated in the secondary placings in Deutsche Annington and Gagfah. These substantial placings €1.3bn almost completes the evolution in ownership of the largest German residential businesses from private equity to institutional equity owners. At the sector level German residential is the fund's second largest exposure, our continued Central London investment being the largest.

Revenue and Revenue Outlook

In the Annual Report I highlighted that we anticipated a fall in earnings for the year to March 2015. As explained in the Chairman's Statement, an unexpected dividend from Max Properties in the first half significantly increased earnings, resulting in an earnings figure, at 6.05p per share, marginally ahead of the half-year earnings in the prior year. As this company has now been acquired and de-listed, this is a non-recurring item.

The revenue tax charge for the first half is lower than for the same period last year, or for the previous full financial year. This is due to a number of receipts in the first half that did not attract withholding tax. This is something over which we have no control and is difficult to predict.

Events now anticipated in the second half means we now expect earnings to be at a similar level to the prior year, although with a number of significant dividends due in the last month of the final year, there is still scope for further surprises.

The next financial year will not have the benefit of these one-off changes, and the development activity on the Colonnades will continue into the next financial year, with the consequential short-term reduction in income from this asset.

Gearing, Debt and Debentures

Gearing increased over the period from 14.0% to 15.9%. This has been achieved through utilisation of our bank debt and through the Contracts for Difference ("CFDs") portfolio. Around 42% of the leverage at the balance sheet date was achieved through the use of CFDs.

Our bank facilities with RBS and ING remain in place and discussions are underway about the renewal of these two facilities due in January and May respectively. We are also in dialogue with other banks and possible longer-term debt providers. We will continue to aim to diversify the sources of our debt.

Direct Property Portfolio

The physical property portfolio produced a total return of 6.9% over the 6 months made up of an income return of 2.1% and a capital return of 4.8%.  This compares to the IPD Monthly Index which produced a total return of 10.0% made up of an income return of 3.1% and a capital return of 6.8%.  On a like for like basis (excluding purchases and sales) the portfolio produced a total return of 7.3% with an income return of 2.3% and a capital return of 5.0%. With a small number of individual properties and much ongoing asset management activity, capital growth is skewed towards individual project completions.

In July we completed the sale of Park Place, Vauxhall to a residential developer for £14.47 million which reflects a capital value of £605 per sq. ft.  Whilst no contract had been exchanged at the March year end the valuers did have sight of the offers that we had received for the property and were, quite correctly, cautious in applying a discount for the risk of completion.  The sale was at a 4.2% premium to the March 2014 valuation after allowing for all sales costs.  During the period the fund also completed the purchase of two industrial buildings in Plymouth and Bristol.  Plymouth is let to Invensys plc until 2023 at a rent of £298,000 per annum (£4.50 per sq. ft.).  A purchase price of £3.25 million reflects a net initial yield of 8.6% and a capital value of £52 per sq. ft.  Bristol is let to Yodel Ltd until 2019 at a rent of £325,000 per annum (£5.00 per sq. ft.).  A purchase price of £4.58 million reflects a net initial yield of 6.7% and a capital value of £91 per sq. ft.  Both units are well located and offer good prospects for rental growth at the next lease event.

Preliminary site works have commenced at The Colonnades, Bayswater in construction of the ground floor retail units and Waitrose supermarket at first floor.  Completion is expected in November 2015 with major works starting in January 2015.  At Wandsworth we completed two leases which brings all tenancies in-line with the potential redevelopment date of September 2016. We have commenced the development of a master plan for the site.

Outlook

In the Annual Report in June the Outlook section focused on the disparity in the rates of growth between the Eurozone and the UK. The UK 2014 GDP growth rate consensus of 3% looks achievable. The contrast with the Eurozone has become even starker, particularly with recent manufacturing and export data from Germany showing a marked slowdown in what has been the only country with a real growth story on the Continent. A clear consequence of this very low growth environment is that the cost of money within the Eurozone will remain at record low levels beyond 2015. Investors still seek income producing assets and whilst banks are clearly reluctant to lend to many enterprises, the perceived security of physical property and its steady income is succeeding in attracting bank finance. Our companies are still reducing their overall cost of debt.

With European CPI now running at less than 0.5% annualised, we expect further unorthodox monetary expansion policies from the ECB. The extent and focus of any asset purchase programme is difficult to predict given the range of national interests within the Eurozone.

The positioning of the portfolio will continue to focus on those markets which are likely to experience rental growth in the near term. Increased exposure throughout the UK regions has been in addition, rather than as an alternative, to, our Central London exposure. We do however continue to be concerned, in the short term, with the Central London housing market which is undergoing a correction after a very strong run from the lows of 2009.

Our strategy will continue to focus on those regions and sectors where we anticipate the greatest likelihood of rental growth. Our concerns about the lack of rental growth across a broad swathe of European property is tempered by our understanding of the requirements of investors today. In a low growth environment where fixed income offers even less than it did 6 months ago, commercial property yielding 4-5% in markets in equilibrium continues to look attractive. If you can source that exposure through businesses which have sound balance sheets, a track record of further value addition through development and asset management and at a discount to near term asset value then we feel that is a compelling investment case today.

Marcus Phayre-Mudge

Fund Manager

26 November 2014

GROUP STATEMENT OF COMPREHENSIVE INCOME

for the half year ended 30 September 2014

	(Unaudited) Half year ended 30 September 2014			(Unaudited) Half year ended 30 September 2013			(Audited) Year ended 31 March 2014
	Revenue Return	Capital Return	Total	Revenue Return	Capital Return	Total	Revenue Return	Capital Return	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Income
Investment income	19,808	-	19,808	20,638	-	20,638	27,791	-	27,791
Other operating income	277	-	277	3	-	3	7	-	7
Gross rental income	1,645	-	1,645	1,673	-	1,673	3,384	-	3,384
Service charge income	731	-	731	721	-	721	1,448	-	1,448
Gains on investments held at fair value	-	17,925	17,925	-	29,635	29,635	-	129,473	129,473
Net returns on contracts for difference	1,282	3,087	4,369	860	1,023	1,883	1,303	6,150	7,453
	_____	_____	_____	_____	_____	_____	_____	_____	_____
Total income	23,743	21,012	44,755	23,895	30,658	54,553	33,933	135,623	169,556
	_____	_____	_____	_____	_____	_____	_____	_____	_____
Expenses
Management fees (note 2)	(617)	(1,852)	(2,469)	(584)	(1,752)	(2,336)	(1,181)	(3,538)	(4,719)
Performance fee (note 2)	-	(1,443)	(1,443)	-	(1,278)	(1,278)	-	(9,669)	(9,669)
Direct property expenses, rent payable  and service charge costs	(948)	-	(948)	(991)	-	(991)	(1,850)	-	(1,850)
Other administrative expenses	(598)	(41)	(639)	(459)		(459)	(890)	-	(890)
	_____	_____	_____	_____	_____	_____	_____	_____	_____
Total operating expenses	(2,163)	(3,336)	(5,499)	(2,034)	(3,030)	(5,064)	(3,921)	(13,207)	(17,128)
	_____	_____	_____	_____	_____	_____	_____	_____	_____
Operating profit	21,580	17,676	39,256	21,861	27,628	49,489	30,012	122,416	152,428
Finance costs	(441)	(1,324)	(1,765)	(382)	(1,146)	(1,528)	(792)	(2,376)	(3,168)
Income from operations before tax	21,139	16,352	37,491	21,479	26,482	47,961	29,220	120,040	149,260
Taxation	(1,924)	874	(1,050)	(2,487)	1,397	(1,090)	(3,540)	3,095	(445)
	_____	_____	_____	_____	_____	_____	_____	_____	_____
Net profit	19,215	17,226	36,441	18,992	27,879	46,871	25,680	123,135	148,815
	_____	_____	_____	_____	_____	_____	_____	_____	_____
Earnings  per Ordinary share (note 3)	6.05p	5.43p	11.48p	5.98p	8.78p	14.76p	8.09p	38.78p	46.87p

The total column of this statement represents the Group's Statement of Comprehensive Income, prepared in accordance with IFRS.  The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies.

All items in the above statement derive from continuing operations.

All income is attributable to the shareholders of the parent company. There are no minority interests.

The final Ordinary dividend of 4.60p (2013: 4.35p) in respect of the year ended 31 March 2014 was declared on 28 May 2014 (2013: 29 May 2013) and was paid on 5 August 2014 (2013: 6 August 2013).This can be found in the Group Statement of Changes in Equity for the half year ended 30 September 2014.

The interim Ordinary dividend of 2.95p (2014: 2.85p) in respect of the year ended 31 March 2015 was declared on 26 November 2014 (2014: 27 November 2013) and will be paid 6 January 2015 (2014: 7 January 2014).

GROUP AND COMPANY STATEMENT OF CHANGES IN EQUITY

	Share Capital Ordinary £'000	Share Premium Account £'000	Capital Redemption Reserve £'000	Retained Earnings Ordinary £'000	Total £'000
for the half year ended 30 September 2014 (Unaudited)
At 31 March 2014
Total comprehensive income:	79,375	43,162	43,934	642,967	809,438
Net profit for the half year	-	-	-	36,441	36,441
Transactions with owners, recorded directly to equity:
Shares repurchased	-	-	-	-	-
Dividends paid	-	-	-	(14,605)	(14,605)
	_  _   __	_  _   __	_  _   __	_  _   __	_  _   __
At 30 September 2014	79,375	43,162	43,934	664,803	831,274
	_  _   __	_  _   __	_  _   __	_  _   __	_  _   __
	Share Capital Ordinary £'000	Share Premium Account £'000	Capital Redemption Reserve £'000	Retained Earnings Ordinary £'000	Total £'000
for the half year ended 30 September 2013 (Unaudited)
At 31 March 2013	79,469	43,162	43,840	517,748	684,219
Total comprehensive income:
Net profit for the half year	-	-		46,871	46,871
Transactions with owners, recorded directly to equity:
Shares repurchased	(94)	-	94	(736)	(736)
Dividends paid	-	-		(13,811)	(13,811)
	_  _   __	_  _   __	_  _   __	_  _   __	_  _   __
At 30 September 2013	79,375	43,162	43,934	550,072	716,543
	_  _   __	_  _   __	_  _   __	_  _   __	_  _   __
	Share Capital Ordinary £'000	Share Premium Account £'000	Capital Redemption Reserve £'000	Retained Earnings Ordinary £'000	Total £'000
for the year ended 31 March 2014 (Audited)
At 31 March 2013	79,469	43,162	43,840	517,748	684,219
Total comprehensive income:
Net profit for the period	-	-	-	148,815	148,815
Transactions with owners, recorded directly to equity:
Shares repurchased	(94)	-	94	(736)	(736)
Dividends paid	-	-	-	(22,860)	(22,860)
	_  _   __	_  _   __	_  _   __	_  _   __	_  _   __
At 31 March 2014	79,375	43,162	43,934	642,967	809,438
	_  _   __	_  _   __	_  _   __	_  _   __	_  _   __

GROUP BALANCE SHEET

as at 30 September 2014

	30 September 2014 (Unaudited) £'000	30 September 2013 (Unaudited) £'000	31 March 2014 (Audited) £'000
Non-current assets
Investments held at fair value	887,651	778,348	880,483
	_________	_________	_________
Current assets
Deferred taxation asset	236	-	200
Other receivables	8,807	7,008	11,405
Cash and cash equivalents	19,529	13,513	9,740
	_________	_________	_________
	28,572	20,521	21,345
Current liabilities	(69,949)	(64,901)	(77,390)
	_________	_________	_________
Net current liabilities	(41,377)	(44,380)	(56,045)
	_________	_________	_________
Total assets less current liabilities	846,274	733,968	824,438
Non-current liabilities	(15,000)	(17,425)	(15,000)
	_________	_________	_________
Net assets	831,274	716,543	809,438
	_________	_________	_________
Capital and reserves
Called up share capital	79,375	79,375	79,375
Share premium account	43,162	43,162	43,162
Capital redemption reserve	43,934	43,934	43,934
Retained earnings	664,803	550,072	642,967
	_________	_________	_________
Shareholders' funds	831,274	716,543	809,438
	_________	_________	_________
Net asset value per :
Ordinary share	261.82p	225.68p	254.94p

GROUP CASH FLOW STATEMENT

For the half year ended 30 September 2014

	Half  year ended 30 September 2014 (Unaudited)	Half year ended 30 September 2013 (Unaudited)	Year ended 31 March 2014 (Audited)
	£'000	£'000	£'000
Reconciliation of operating revenue to net cash flow from operating activities
Profit from operations before tax	37,491	47,961	149,260
Financing activities	1,765	1,528	3,168
Gains on investments held at fair value through profit or loss	(22,679)	(30,476)	(135,270)
Foreign exchange movements	1,667	(182)	(353)
Decrease/(increase) in accrued income	1,129	(681)	(284)
(Increase)/decrease in other debtors	(108)	824	(1,194)
(Decrease)/increase in creditors	(4,995)	(1,822)	6,663
Net sales/(purchases) of investments	18,101	(6,895)	(6,163)
Decrease in sales settlement debtor	758	499	386
Decrease in purchase settlement creditor	(2,681)	(6,214)	(6,749)
Scrip dividends included in investment income	(1,203)	(2,230)	(2,641)
	_________	_________	_________
Net cash inflow from operating activities before interest and taxation	29,245	2,312	6,823
Interest paid	(1,765)	(1,528)	(3,168)
Taxation paid	(1,419)	(2,072)	(3,338)
	_________	_________	_________
Net cash inflow/(outflow) from operating activities	26,061	(1,288)	317
Financing activities
Equity dividends paid	(14,605)	(13,811)	(22,860)
Repurchase of shares	-	(736)	(736)
Drawdown of loans	-	15,500	19,000
	_________	_________	_________
Net cash used in financing	(14,605)	953	(4,596)
	_________	_________	_________
Increase/(decrease) in cash	11,456	(335)	(4,279)
Cash and cash equivalents at start of the period	9,740	13,666	13,666
Exchange movements	(1,667)	182	353
	_________	_________	_________
Cash and cash equivalents at end of the period	19,529	13,513	9,740
	_________	_________	_________

NOTES TO THE FINANCIAL STATEMENTS

1	Basis of accounting
	The accounting policies applied in these interim financial statements are consistent with those applied in the Company's most recent annual financial statements, except for the adoption of new standards and interpretations effective as of 1 January 2014. The financial statements have been prepared in accordance with International Accounting Standard (IAS) 34 'Interim Financial Reporting'. The adoption of the following standards has had no impact on the Financial Statements: ·      IFRS 10 - Consolidated Financial Statements ·      IFRS 12 - Disclosure of Interests in Other Entities
	The financial statements are presented in Sterling and all values are rounded to the nearest thousand pounds (£'000) except where otherwise indicated.
2	Management fees
			(Unaudited) Half year ended 30 September 2014					(Unaudited) Half year ended 30 September 2013							(Audited) Year ended 31 March 2014
			Revenue Return £'000	Capital Return £'000		Total £'000		Revenue Return £'000			Capital Return £'000		Total £'000		Revenue Return £'000	Capital Return £'000		Total £'000
	Management fee		617	1,852		2,469		584			1,752		2,336		1,181	3,538		4,719
	Performance fee		-	1,443		1,443		-			1,278		1,278		-	9,669		9,669
			_____	____		_   ___		_____			____		____		____	____		___
			617	3,295		3,912		584			3,030		3,614		1,181	13,207		14,388
			_____	_____		_____		_____			_____		____		_____	_____		____
	A provision has been made for a performance fee based on the net assets at 30 September 2014. No payment is due until the full year performance fee is calculated at 31 March 2015.
3	Earnings per Ordinary share
	The earnings per Ordinary share can be analysed between revenue and capital, as below.
							Half year ended 30 September 2014 (Unaudited) £'000						Half year ended 30 September 2013 (Unaudited) £'000				Year ended 31 March 2014 (Audited) £'000
	Net revenue profit						19,215						18,992				25,680
	Net capital profit						17,226						27,879				123,135
							_______						_________				_________
	Net total profit						36,441						46,871				148,815
							_______						_________				_________
	Weighted average number of Ordinary shares in issue during the period						317,500,980						317,571,608				317,536,391
							pence						pence				pence
	Revenue earnings per Ordinary share						6.05						5.98				8.09
	Capital earnings per Ordinary share						5.43						8.78				38.78
							_______						_________				_________
	Earnings per Ordinary share						11.48						14.76				46.87
							_______						_________				_________
4		Changes in share capital
		During the half year no Ordinary shares have been purchased and cancelled. As at 30 September 2014 there were 317,500,980 Ordinary shares (30 September 2013 and 31 March 2014: 317,500,980 Ordinary shares) in issue.
5		Going concern
		The directors believe that it is appropriate to adopt the going concern basis in preparing the financial statements. The assets of the Company consist mainly of securities that are readily realisable and, accordingly, the Company has adequate financial resources to meet its liabilities as and when they fall due and continue in operational existence for the foreseeable future.
6		Fair value of financial assets and financial liabilities
		Financial assets and financial liabilities are carried in the Balance Sheet either at their fair value (investments) or the balance sheet amount is a reasonable approximation of fair value (due from brokers, dividends and interest receivable, due to brokers, accruals and cash at bank). Fair value hierarchy disclosures The table below sets out fair value measurements using IFRS 13 fair value hierarchy:
		Financial assets at fair value through profit and loss
		At 30 September 2014			Level 1 £'000					Level 2 £'000				Level 3 £'000			Total £'000
		Equity investments			809,703					-				183			809,886
		Investment Properties			-					-				69,337			69,337
		Fixed interest investments			2,493					5,935				-			8,428
		Contracts for difference			-					2,533				-			2,533
					_______					_______				_______			_______
					812,196					8,468				69,520			890,184
					_______					_______				_______			_______
		At 30 September 2013			Level 1 £'000					Level 2 £'000				Level 3 £'000			Total £'000
		Equity investments			717,408					-				204			717,612
		Investment Properties			-					-				55,656			55,656
		Fixed interest investments			-					5,080				-			5,080
		Contracts for difference			-					1,012				-			1,012
					_______					_______				_______			_______
					717,408					6,092				55,860			779,360
					_______					_______				_______			_______
		At 31 March 2014			Level 1 £'000					Level 2 £'000				Level 3 £'000			Total £'000
		Equity investments			800,967					-				204			801,171
		Investment Properties			-					-				71,115			71,115
		Fixed interest investments			2,632					5,565				-			8,197
		Contracts for difference			-					3,351				-			3,351
					_______					_______				_______			_______
					803,599					8,916				71,319			883,834
					_______					_______				_______			_______
		Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset as follows: Level 1 - valued using quoted prices in an active market for identical assets. Level 2 - valued by reference to valuation techniques using observable inputs other than quoted prices within level 1. Level 3 - valued by reference to valuation techniques using inputs that are not based on observable market data. Contracts for Difference are synthetic equities and are valued by reference to the investments' underlying market values. Included within Level 2 is a holding in NewRiver 5.85% 31/12/15 Convertible Unsecured Loan Stock which is listed on the Guernsey stock exchange with a value of £5,935,000. Valuations of Investment Properties - Level 3 The Group carries its investment properties at fair value in accordance with IFRS 13, revalued twice a year, with changes in fair values being recognised in the Group Statement of Comprehensive Income. The Group engaged Deloitte Real Estate LLP as independent valuation specialists to determine fair value as at 30 September 2014. Determination of the fair value of investment properties has been prepared on the basis defined by the RICS Valuation Professional Standards, Global & UK Edition, January 2014 (The Red Book) as follows: "The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion." The valuation takes into account future cash flow from assets (such as lettings, tenants' profiles, future revenue streams, capital values of fixtures and fittings, plant and machinery, any environmental matters and the overall repair and condition of the property) and discount rates applicable to those assets. These assumptions are based on local market conditions existing at the balance sheet date. In arriving at their estimates of fair values as at 30 September 2014, the valuers have used their market knowledge and professional judgement and have not only relied solely on historical transactional comparables. Reconciliation of movements in Financial assets categorised as level 3
		At 30 September 2014		31 March 2014 £'000		Transfers from Level 1 to 3 £'000			Purchases £'000			Sales £'000		Appreciation/ Depreciation £'000			30 September 2014 £'000
		Unlisted equity investments		204		-						-		(21)			183
		Investment Properties
		-     Mixed use		34,500		-			615			(185)		1,905			36,835
		-     Industrial		11,550		-			8,274			-		201			20,025
		-     Offices		25,065		-			402			(14,470)		1,480			12,477
				71,115		-			9,291			(14,655)		3,586			69,337
				71,319		-			9,291			(14,655)		3,565			69,520
		Transfers between hierarchy levels There were no transfers between any levels during the period. Sensitivity information The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of investment properties are: ·      Estimated rental value ·      Rent growth ·      Long term vacancy rate Significant increases (decreases) in estimated rental value and rent growth in isolation would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in long-term vacancy rate in isolation would result in a significantly lower (higher) fair value measurement. Debenture loan The debenture loan of £15,000,000 (30 September 2013 and 31 March 2014: £15,000,000) of 11.5% 2016 stock is issued by Trustco Finance plc and is guaranteed by the Company through a floating charge over its assets. The fair value of this debenture at 30 September 2014 was £16,851,000 (30 September 2013: £17,963,000) and (31 March 2014: £17,429,000). Using the IFRS 13 fair value hierarchy the debenture stock is deemed to be categorised within Level 1. The Company and Group have complied with the terms of the debenture agreement throughout the year. Multi-currency revolving loan facilities The Group also has unsecured, multi-currency, revolving short-term loan facilities totalling £80,000,000 (30 September 2013: £80,000,000) and (31 March 2014: £80,000,000). At 30 September 2014 £61,000,000 was drawn on these facilities (30 September 2013: £57,500,000) and (31 March 2014: £61,000,000). The fair value is considered to approximate the carrying value and the interest is paid at a margin over LIBOR.
7		Subsidiaries The Group has the following principal subsidiaries, all of which are registered and operating in England and Wales:
		Name of Company								Principal Activities
		TR Property Finance Ltd								Investment holding and finance
		Trust Union Properties (Bayswater) Ltd								Property investment
		The Colonnades Ltd*								Property investment
		Trustco Finance plc								Debenture issuing vehicle
		All the subsidiaries are fully owned and all the holdings are ordinary shares. The Group also has other subsidiaries which are considered not significant as they are either not trading or are immaterial. *Indirectly held
8		Related Party Transactions
		There have been no material related party transactions during the period and no changes to related parties. During the period Thames River Capital charged management fees as detailed in Note 2. The remuneration of the directors has been determined in accordance with rates outlined in the Director's Remuneration Report in the Annual Financial Statements.
9		Comparative information
		The financial information contained in this Half-Yearly Financial Report does not constitute statutory accounts as defined in section 435(1) of the Companies Act 2006. The financial information for the half year periods ended 30 September 2014 and 30 September 2013 has not been audited or reviewed by the Group auditors. The figures and financial information for the year ended 31 March 2014 are an extract from the latest published accounts and do not constitute statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and include the report of the auditors, which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006.

This announcement and the information contained herein is not for publication, distribution or release in, or into, directly or indirectly, the United States, Canada, Australia or Japan and does not constitute, or form part of, an offer of securities for sale in or into the United States, Canada, Australia or Japan.

The securities referred to in this announcement have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the "Securities Act") and may not be offered or sold in the United States unless they are registered under the Securities Act or pursuant to an available exemption therefrom.  The Company does not intend to register any portion of securities in the United States or to conduct a public offering of the securities in the United States.  The Company will not be registered under the U.S. Investment Companies Act of 1940, as amended, and investors will not be entitled to the benefits of that Act.

This announcement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the securities referred to herein in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration, exemption from registration or qualification under the securities law of any such jurisdiction. 

The contents of this announcement include statements that are, or may be deemed to be "forward looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "anticipates", "expects", "intends", "may", "will" or "should".  They include the statements regarding the target aggregate dividend.  By their nature, forward looking statements involve risks and uncertainties and readers are cautioned that any such forward-looking statements are not guarantees of future performance.  The Company's actual results and performance may differ materially from the impression created by the forward-looking statements. The Company undertakes no obligation to publicly update or revise forward-looking statements, except as may be required by applicable law and regulation (including the Listing Rules).  No statement in this announcement is intended to be a profit forecast.

For further information please contact:

Marcus Phayre-Mudge

Fund Manager

TR Property Investment Trust plc

Telephone: [phone]

Jo Elliott

Finance Manager and Investor Relations

TR Property Investment Trust plc

Telephone: [phone]

 

END

 

 

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